Why you should reverse engineer your endgame before buying a franchise

Many entrepreneurs are turning to franchising or investing in established systems. Some are creating their own concepts with the goal of scaling, but few have put in the effort to optimize their chosen path for maximum success.

On today’s episode of Strategic Edge, Jay Abraham, executive coach and founder and CEO of the Abraham Group, says most franchise buyers never define what they actually want the investment to produce before they commit. Would-be franchisors, he says, often fail to prove their concept actually works.

His solution is to reverse-engineer your endgame first. Define exactly what you want the investment to produce in terms of income, wealth, optionality, and exit value, then compare alternatives against those criteria before committing to anything.

The 5 questions you must ask before buying a franchise

Abraham says the first mistake most franchise buyers make is not knowing what they actually want. Many, he says, don’t realize they’re buying themselves a job and not always a well-paying one.

"You've got to get really true to yourself. What is your real end game?"

Abraham states that curiosity leads buyers into unfamiliar industries, but their interest quickly fades if the economics aren’t favorable. He then outlines five key questions that every serious buyer must answer before making a commitment:

1. How stable and predictable is the franchise over the next decade?
2. Will its potential yield be more valuable as an asset to sell than an alternative investment?
3. Will the franchisor generate clients, or will that burden fall on you?
4. How does it perform against a criteria of alternatives?
5. If you know nothing about the business, does it have the ability to support a competent general manager?

“Most people don’t reverse engineer anything. They just sort of jump into it impulsively,” he said.

Why you need to look at 100+ options

Even buyers who approach franchising with good intentions can get steered in the wrong direction. Abraham says the franchise broker system is built in a way that doesn’t always serve the buyer.

“There’s lots of franchise brokers, not criticizing them, but they will sell you what you’ll buy, not necessarily what’s in your best interest,” he said.

Abraham says brokers typically represent a limited roster of franchise companies and are compensated with a large portion of the franchise fee. A buyer looking into dog grooming, for example, may only hear about the one dog-grooming franchise that the particular broker represents, not the best option in that space. Abraham recommends considering at least 100 possibilities before making any decision.

Dig deeper into due diligence

Beyond the broker problem, Abraham says most buyers simply don’t dig deep enough into the franchise itself. Talking to current franchisees is not enough. He says the most valuable conversations are often with the ones who didn’t make it.

“You want to talk to people that didn’t do well, that either got their franchise taken away or walked away or went back,” he said.

Abraham also says buyers should go further than any conversation. Before spending a single dollar, he recommends working inside the business firsthand.

"Before I'd spend any money, I would go and want to work at one of them myself." 

He draws a parallel to a house he once bought because of its view, only to discover a busy highway underneath it on weekends. The lesson, he says, is that people see what they want to see. Abraham shared a lesson he learned from marketing consultant Harvey McKay, who says you should insist on staying a full weekend at a home you’re interested in buying. Abraham says that the same logic applies to buying a franchise. 

Do thine franchisees no harm

Some of the most dangerous situations in franchising come from the other side, when entrepreneurs try to franchise a concept that was never ready to scale.

“You don’t have any proof it’ll work. They have to invest about $300,000 unproven. You don’t have any way to generate business for them. It’s a theoretical construct and you’re asking them to put all their faith in you,” he said.

Abraham describes working with a client who had franchised a business before proving it could work on a localized basis. The franchise company signed off, franchisees paid in, and it failed. He says the experience reinforced a standard he has carried throughout his career.

“I came from the world that was sort of modeling what a doctor adheres to when he or she becomes a physician. It’s do thine patient no harm. And I’m not sure all the franchisors are committed to do their franchisees no harm,” he said.

The most important question

For entrepreneurs who think they have a concept worth scaling, Abraham says the most important question is whether the franchisor has a reliable, cost-effective way to get clients to franchisees.

“You’ve got to think about how are you going to constantly feed them clients in a cost effective way,” he said.

He says the franchisors worth trusting are the ones who don’t make money unless their franchisees do. A large upfront franchise fee with no skin in the game is a warning sign. Abraham points to a client who built a portfolio of 10 small, simple franchise units across different concepts, hired a competent manager, shared the upside, and generated $2 million a year while playing golf. That, he says, is the model worth studying. He leaves buyers and aspiring franchisors with the same warning.

“They’re superficially impulsive, impetuous, and undiscerning and I think that’s dangerous. They see what they want to see. Getting in is a lot easier than getting out,” he said.

Abraham’s advice across both sides of the franchise equation comes down to the same principle. Slow down, define your endgame, and compare every option against a criteria you establish before anyone starts selling you on anything.